Bad estimate on Nextel account costs firm

Three days before the 2004 Daytona 500, Johnny Capels knew he had a problem. His marketing company, National Tour Inc., had three months earlier landed the Nextel account and was set to begin the relationship by providing mobile marketing support and services at each Nextel Cup race for a one-of-a-kind, 6,400-square-foot “Glass House” that would display the company’s technology and attract thousands of fans with racing simulators and gaming kiosks.

After the first year, National Tour had lost $1.2 million from its Nextel account.

Problem was, the five haulers that were carrying the glass and the rest of the equipment that would combine to create this iconic mobile marketing unit were filling up. And they were filling up quickly.

“My estimations were way off,” said Capels, National Tour’s founder and CEO. “We estimated that it was a five-truck deal with 16 people. It became 10 trucks with 25 people.”

Today, Nextel’s at-track experience requires 14 haulers and between 25 and 28 people to operate.

Because Capels underestimated the required resources, his low bid of $250,000 a month was enough to win the account for five years, through 2008. But his miscalculation had another effect: It cost him and Concord, N.C.-based National Tour, a full mobile marketing provider, hundreds of thousands of dollars, ultimately landing the company in Chapter 11 reorganization.

“I had to put in $100,000 to $125,000 of my own money every month just to keep it going,” Capels said.

Even that wasn’t enough. After the first year, National Tour had lost $1.2 million from the Nextel account, one the company had projected would net close to $1 million in profit per year.

National Tour’s financial problems, spearheaded by the severe underbidding of that account, came to a head earlier this month when the company filed for bankruptcy protection in Southern California, where it was based until November 2004. According to a cash collateral document filed Oct. 7 in that state’s Central District Bankruptcy Court, National Tour “sustained significant losses and fell behind in payments to its creditors.”

National Tour filed less than two weeks before a more stringent bankruptcy law went into effect, but Capels said the IRS freezing the company’s bank account had a much larger bearing on the timing of the filing than the new law did.

Jim Bastian Jr., the company’s attorney, said National Tour’s total debt “is just a hair under $5 million,” with a large chunk — $4.2 million — being owed to California Bank & Trust and the IRS.

National Tour, whose client list also includes Anheuser-Busch, BMW, DeWalt, Irwin, Nike and Pioneer, is starting to realize some cost savings from its relocation to North Carolina that should help in the reorganization process.

Capels said the company, which has 85 employees, pays $49,000 a month in rent for 60,000 square feet of office and warehouse space in Concord. In California, Capels said he wrote a check every month for $55,000 for 22,000 square feet.

In addition to rent, Capels said the move decreased operating, utility, insurance and labor costs. In fact, because of its move to North Carolina, Bastian said National Tour is saving about $1 million a year from worker’s compensation, medical insurance and liability insurance.

Even though National Tour has started to realize some of the financial benefits of the move, the major improvement in the company’s cash flow comes not from increased savings, but rather from increased revenue. Most notably from Nextel, its most high-profile account.

“It ended up costing way more than we had budgeted,” Capels said, “but I had written the contract and I wanted to keep my word.”

So National Tour stuck it out, showing up at the track each week. Toward the end of the year, though, Capels knew he couldn’t continue without more money from Nextel.

After auditing National Tour’s books, at Capels’ request, and realizing what Capels had realized three days before the Daytona 500, Nextel agreed earlier this year to increase its monthly payments and keep the “House” afloat. By doubling its payments to what Bastian said is “north of $500,000 per month,” or $6 million a year, Nextel kept National Tour afloat as well.

“The basic terms are still the same, it’s just that they offered more money on a monthly basis to help ease the pain,” Bastian said.

Michael Robichaud, vice president of marketing for Sprint/Nextel, could not be reached for comment. Michael Mooney, a company spokesman, said National Tour “is a valued vendor of ours and they’ve been very up-front about their financial situation. We’ve been in regular communication with [National Tour], and we’re looking for them to work through this.”

According to the bankruptcy filing, National Tour “is party to several long-term contracts with DeWalt, Irwin, Sprint/Nextel, BMW and others which provide monthly revenue in excess of $800,000,” and Capels said all of the accounts, except Nextel, are profitable.

Capels said National Tour also has recently added GE, DLP, Trex and the NASCAR Members Club to its list of clients. Capels said he has talked to every client and informed them where the company stands and its plans for sustaining itself.

“During November, December and January, the overhead expenses of the business go down dramatically, but the revenues stay the same because Nextel pays on a 12-month calendar and not a nine-month calendar,” Bastian said. “What we intend to do is boost the cash during that end-of-the-year period, and we’re looking to emerge from the bankruptcy proceeding in February.”

Asked how one account could have such a monumental effect on the company’s books, Capels almost laughed and said: “It’s like the Rolling Stones. You’re setting up every day and you tear down every night, but the Stones have three sets across the country, piggy-backing each other. We have one set that has to go from Sonoma [Calif.] to Daytona [Beach, Fla.] in two days, from Fontana [Calif.] to Richmond [Va.] in one and a half days. It’s a huge undertaking.”